Bitcoin goes up and down, but Nvidia is sure to make money

Source: Capital Detective

Author: Hong Yuhan

After the Biden administration passed the $1.9 trillion COVID-19 relief bill on March 12, the market was flooded and the price of Bitcoin (BTC) rose again, reaching $60,000. However, the good times did not last long. After that, there was news that the Indian government might propose a bill to ban cryptocurrencies, and the price of Bitcoin immediately plunged, falling by more than $5,000.

The famous investor and scholar Malkiel once introduced the concept of "random walk" into the stock market, which means that the short-term fluctuations of stock prices are unpredictable. Today, encrypted digital currencies, led by Bitcoin, have shown more intense fluctuations. In the past 12 years, the price of Bitcoin has soared tens of millions of times from worthless to $60,000. Ups and downs are the norm.

As the world's leading graphics card manufacturer, Nvidia may not be the biggest wealth grabber in the wave of encrypted digital currency, but it is definitely the one that makes money the least stressful. It does not have to worry about whether the cryptocurrencies have any credit endorsement or the rise and fall of market prices. It only needs to sit back and count money until it gets cramped.

To understand this, we have to start with cryptocurrency.

Giant on the cusp

When talking about cryptocurrencies, we have to mention Bitcoin.

According to the relevant paper published by Satoshi Nakamoto (not his real name) on October 31, 2008 (also known as the Bitcoin "white paper" in the currency circle), Bitcoin is a cryptocurrency based on decentralization, peer-to-peer network and consensus initiative, open source code, and blockchain as the underlying technology. Some countries and banks prefer to call it a virtual commodity rather than a currency.

Screenshot of the White Paper

Anyone can obtain Bitcoin through the Internet and computing power. This exploration method of obtaining Bitcoin is called "mining", and people who participate in mining activities are called "miners". Satoshi Nakamoto likened the production of Bitcoin by consuming CPU computing power, electricity and time to the consumption of resources by gold mines, injecting gold into the economy.

I will not discuss the technical path of obtaining Bitcoins through computing power in network nodes. What is clear is that the more powerful the computing power of miners, the faster they can obtain various cryptocurrencies including Bitcoin. Graphics cards with GPU computing power are the core tools for many miners in the early days of mining. Therefore, before Bitcoin became popular, many people obtained a lot of Bitcoins by mining with computer graphics cards.

However, as more and more computing power is added to mining, and the rule that the number of Bitcoins produced is halved approximately every four years, the difficulty of mining has increased exponentially. Since 2014, the large amount of electricity consumed by ordinary GPU graphics card mining has made mining unprofitable, and Bitcoin mining has become a game for large miners.

At this time, many small and medium-sized miners turned their attention to other cryptocurrencies. As Bitcoin's technical concepts and popularity rose with its market value, miners not only earned income through mining, but also wanted to develop a new blockchain platform to earn more income. Therefore, in recent years, countless blockchain platforms have been launched and issued their own cryptocurrencies.

These cryptocurrencies are either due to their platform rules or are still in the early stages of development, so it is still profitable for miners to mine with graphics cards. Take Ethereum, for example, it has become the second-highest cryptocurrency by market value, with a unit price that has soared from more than $300 in October last year to $1,770 now, just below Bitcoin.

The skyrocketing price of Ethereum has made it hard to find graphics cards for mining. For example, the RTX 3060 series graphics cards released by Nvidia in February this year have an official listing guide price of 2,499 yuan, but in the flagship stores of various channel merchants on shopping platforms such as Taobao and JD.com, the 2,499 yuan graphics cards have been out of stock.

Even on Xianyu, the price of RTX 3060 series graphics cards is generally around 5,000 yuan. Some netizens said on Tieba that they had made an appointment for a snap-up event for a certain brand of this series of graphics cards on JD.com. However, it was shown as out of stock after only one second. The netizen had to consider buying a complete machine equipped with an RTX 3060 series graphics card.

Source: Xianyu screenshot

The mining craze has even spread from graphics cards to gaming laptops. When searching for "3060 notebook" on e-commerce platforms, the Shenzhou series gaming laptops show that 46,000 units have been sold. In the question-and-answer section of the product, many consumers ask questions related to mining, such as "What is the computing power?", "Will it get hot if the computing power is used continuously?", "How stable is 24-hour mining?"

In the product comment section, many buyers said that after payment, the mouse sent by the manufacturer has arrived, but the gaming laptop has not arrived after waiting for a week. This also indirectly shows the popularity of laptops equipped with RTX 3060 series graphics cards.

Laptop mining pictures circulating on the Internet

Of course, the reason for the scarcity of graphics cards across the network cannot be blamed solely on the miners who are frantically purchasing graphics cards. Behind it is the deep-seated impact of the global chip shortage. Regardless of whether the buyer is a miner or a gamer, Nvidia is in a seller's market and will not worry about not making money as long as it supplies.

However, things are not as simple as they seem.

Sweet Burden

First of all, Nvidia is not the only graphics card supplier in the market. Its old rival AMD is quite powerful. According to the analysis report on the GPU market in the fourth quarter of 2020 released by the statistics agency Jon Peddie Research (JPR), in the discrete graphics market (graphics cards sold alone), Nvidia took 82% of the market and AMD took 18% of the market.

Amid the mining craze, what Nvidia does not want to see is that its graphics cards become mining tools for miners, and consumers are forced to buy competitors' products, so that game manufacturers also tend to turn to AMD graphics cards to optimize game adaptability.

Source: Jon Peddie Research

Secondly, the graphics cards used for mining are subject to significant wear and tear due to overclocking, high temperatures, and 24-hour non-stop use. In the early days, many miners took advantage of loopholes in the warranty period and approached graphics card manufacturers to replace them with new graphics cards, but the manufacturers refused after discovering the problem. When "mining cards are not covered by warranty" became an open secret in the industry, miners could only sell the "mining cards" with greater wear and tear to the second-hand market.

Since "mining cards" on the second-hand market are of poor quality and have a limited lifespan, the sale of new cards on the market is generally not affected. However, if the price of Ethereum plummets (mining disaster), miners will sell off their new and old mining cards at low prices to recover their losses, which will inevitably attract gamers to buy second-hand graphics cards and affect Nvidia's new product sales.

Finally, revenue from sales of gaming graphics cards remains Nvidia's core business, which accounts for the bulk of its revenue. Its downstream industry chain includes various game manufacturers, game console hardware manufacturers, and consumers who ultimately pay for it.

On the one hand, according to Nvidia's 2021 fiscal year financial report, games and data centers are the mainstays of Nvidia's revenue, with gaming business generating the highest revenue, accounting for 46.5% of Nvidia's total revenue. Therefore, when there was a shortage of gaming graphics cards in the market and game enthusiasts complained online, Nvidia had to face it with caution.

Source: Nvidia’s 2021 fiscal year financial report

On the other hand, according to the 2020 Global Game Market Value Report summarized by GamesIndustry, the total value of the global game market reached US$174.9 billion, of which PC games were worth US$37.4 billion, accounting for 22%; console games were worth US$51.2 billion, accounting for 29%; and mobile games were worth US$86.3 billion, accounting for 49%. The proportion of the PC and console game industry that requires graphics cards is decreasing. If relevant game enthusiasts cannot get gaming graphics cards at normal market prices, their attention is likely to shift to other hobbies.

Source: GamesIndustry

In PCs and consoles, the computing power of gaming hardware, including graphics cards, is the key to determining game quality, special effects, playability, etc. The upgrade and iteration of graphics cards determines the performance of the new generation of game consoles, and also determines the space for game developers to develop a new generation of innovative games.

If gamers give up playing PC and console games because they can't buy graphics cards, the funds and motivation of game manufacturers to develop new games will also be reduced, and the number of high-quality games on the market will decrease, which will lead to a further decrease in the number of players willing to spend money to buy games and replace gaming hardware including graphics cards. Once this negative cycle in the PC and console game industry is formed, the consequences will be unbearable for Nvidia.

To prevent the worst outcome, Nvidia has made preparations for both scenarios.

The first is to launch professional mining cards for miners. On February 19, NVIDIA launched NVIDIA CMP (Cryptocurrency Mining Processor). According to the official introduction, CMP has no display output, no graphics processing, and has a lower core peak voltage and frequency, thereby improving the efficiency of cryptocurrency mining.

Secondly, the mining efficiency of RTX 3060 will be reduced to 50%. On February 25, Nvidia said that the RTX 3060 software driver will detect the specific properties of the Ethereum cryptocurrency mining algorithm and limit the hash rate or cryptocurrency mining efficiency to around 50%, which means that miners who buy this series of graphics cards for mining will earn half the profit.

Nvidia's calculations are shrewd: it wants to enjoy the dividends brought by the cryptocurrency boom while also wanting to maintain its existing gaming market. However, reality slaps it in the face.

According to foreign media VideoCardz, the Ethereum mining efficiency of NVIDIA CMP 30HX, a professional mining card launched by NVIDIA, is about 26 MH/s, which is similar to the mining efficiency of the restricted RTX 3060 graphics card. Although the price has dropped slightly, the mining speed has not increased.

Immediately afterwards, on March 15, Japanese media PC Watch stated that the mining restrictions on RTX 3060 could be lifted by using the GeForce 470.05 driver alone. After the restrictions were lifted, the graphics card could return to the Ethereum mining computing power of 45 MH/s.

On the 16th, Nvidia acknowledged the authenticity of the news, and a spokesperson said: "A developer driver inadvertently integrated code for internal development, which can remove the hash algorithm restrictions of RTX 3060 under specific configurations. The driver has been removed." Although Nvidia said this was an accident, its reputation was inevitably affected.

Combined with Nvidia's 2021 fiscal year financial report, its gaming business revenue in the fourth quarter of last year increased by 67% year-on-year. The market believes that this is related to the large influx of its graphics cards into the hands of miners. In the earnings call, Nvidia CFO Colette Kress admitted: "In the last quarter, about $100 million to $300 million in sales came from 'miners'."

Some analysts estimate that Nvidia sold at least $1.1 billion worth of graphics chips directly to miners in 2020. In any case, Nvidia, as an infrastructure provider, has made a lot of money amid the craze for cryptocurrencies.

Back to the context of the cryptocurrency craze, Musk invested $1.5 billion to buy Bitcoin and Meitu bought $40 million worth of Ethereum and Bitcoin, which made many people feel that large institutions and large companies have begun to enter the market. If they do not join, they will miss the opportunity to leap forward in their destiny after the wave of going public, the real estate market, and Internet stocks. This is a typical fear of missing out.

As an emerging asset, the prospect of financial infrastructure for cryptocurrencies is still unknown. The exchanges where most people store cryptocurrencies are not real Bitcoin addresses, and users do not actually hold the currency in the network blockchain. In reality, there is no actual equivalent to endorse the value of cryptocurrencies.

This is a roller coaster-like wealth game. Only by "surviving the bubble and pocketing the profits" can you remain undefeated in the game, just like Nvidia. However, many entrants in the cryptocurrency market are only engaged in highly uncertain speculative activities.